Separation results in a significant change to many areas of life – one of the most noticeable areas being in relation to finances and even the mortgage.
Old budgets become irrelevant because of the shift from two incomes being pooled and applied toward joint expenses, to single incomes supporting separate households. This shift can make people feel like it is an impossible equation, where expenses too often are more than income.
As finances become strained there may be difficulties meeting mortgage repayments and other liabilities. It is helpful to know what to do when circumstances change and there are challenges meeting mortgage repayments.
Who pays the mortgage following separation and what happens if it is no longer possible to pay the mortgage?
Separation does not alter the rights that a lender has to be repaid money owed by a borrower. The contract between a lender and a borrower is not affected by separation and a borrower has a legal obligation to repay monies as they fall due to the lender. Failure to repay monies can impact a borrower’s credit rating.
Following a separation, one party may remain in the former home of the relationship, and the other party may move out. It can be common in these circumstances for there to be an agreement for the party who remains in the former home of the relationship to take full responsibility for making the mortgage repayments, even if the mortgage is actually in joint names or solely in the name of the party who has vacated the home.
Any agreement is however only a private agreement and doesn’t affect the rights of the lender. The borrower or borrowers are still legally responsible to repay the monies owing to the lender and if there is a default on a private agreement the borrower will need to pay the monies owing in order to protect their credit rating.
If circumstances arise making it difficult to meet mortgage repayments there are options that can be considered including
(1) discussing with the bank whether a ‘loan holiday’ can be granted for an agreed period of time until final property / financial settlement can be resolved. Essentially this means that the bank agrees to payments not being made for a certain period of time. The payments that are not made are then added to the payments over the rest of the term of the loan.
(2) discussing the situation with the other party and trying to reach agreement about alternative options, for example whether there are other assets that can be liquidated and applied to the loan repayments. Discussions between the parties should only occur it is safe and there are no family violence orders in place preventing communication
(3) looking at the possibility of the house being rented;
(4) looking at the possibility of the house being sold
(5) discussing options for interim and final property / financial settlement with a family lawyer.
What do changes in property prices mean for property / financial settlement if I’m separated
The property market can be subject to increases and decreases in prices over time. It is important to understand that for the purposes of property / financial settlement, the value of real property is determined at the date of settlement, not the date of separation.
An up-to-date and current value of the property is therefore an important piece of information that can assist the parties to resolve property / financial settlement, particularly if the parties have differing views about value.
Generally, equity in real property can represent a substantial proportion of the net assets that are available for distribution between the parties. When the property market is hot this therefore means the net assets available for division between the parties are more and each party will be in an overall better position than if the property market is declining or softening.
There are various approaches that can be used to determine the value of real property and the correct approach depends on the particular circumstances of the situation. For example, if real property is being sold the value will be determined by the actual sale price, however real estate appraisals may be necessary to determine the listing price for the property.
On the other hand, if real property is being retained by one party a registered valuation should be obtained to determine the value of the property.
It can be helpful to obtain advice from a qualified family lawyer regarding entitlements to property / financial settlement, shortly following separation. A family lawyer can provide advice about individual scenarios for structuring property / financial settlement.
When is it possible to access a deferred payment arrangement for family law fees and who is eligible
As mentioned previously parties can experience financial stress in the period between separation and until property / financial settlement is finally resolved. When parties own real property this may mean they are eligible for a deferred payment arrangement of legal fees to formalise their property / financial settlement.
Basically, this means that legal fees can be paid at the end of the matter once the property and financial settlement has been completed.
Deferred payment arrangements through third party legal finance providers take the financial stress out of the situation by allowing separated individuals to access the help they need when they need it most and allowing parties to meet their day to day expenses following separation.
By Carolyn Devries, founder of Australia’s first not-for-profit law firm, New Way Lawyers